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Recognising a borrowed asset in the accounts

Do you recognise a borrowed asset in a set of accounts, and if so how?

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If a company were to borrow an asset for use in the business, should you recognise this in the accounts (FRS102). If so, how?

Examples: - 

- A farming company borrowers a £200k pea viner from a friend of the farmers - There is no consideration and the pea viner must be returned when the owner requests for it to be

- A tourist attraction borrowers a 1kg bar of gold worth £50k to exhibit - There is no consideration and a gold bar must be returned when the owner requests for it to be

The bar of gold is fungible, and in theory the owner could allow the company borrowing the gold to sell the bar, provided that they can provide a replacement bar of the same quality when the owner would like it back. 

I don't believe that lease accounting would/could apply, given that there would be no consideration, and that the asset is not being lent for a fixed term.

On the face of it to me, niether transaction would need to be recognised in the accounts. There is, however, a risk to the company of using the asset (eg it is damaged or lost) and therefore perhaps a disclosure is all that is required?

In the gold example, the company could generate £50k of cash from the borrowed of the asset, but would then have an obligation to buy back the same type of gold bar.  Would this just be recognised as a £50k provision in the accounts?

Replies (90)

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Stepurhan
By stepurhan
17th Jun 2021 07:11

Any obligation would only be triggered by damage or loss of the borrowed asset. You wouldn't make a provision against the uncertain possibility of damage or loss of an asset the busines owned would you.

In theory the owner could allow the sale of the gold bar. In practice, why would they. They have lent it, solely to be exhibited, for nothing. Why would they increase the risk of not getting anything back by allowing it to be sold?

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Replying to stepurhan:
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By chrisacc1985
17th Jun 2021 09:09

I agree that allowing the company to sell it wouldn’t make sense, however, it is possible.

In theory it could be a third party friend, but it would more likely arise if the gold bar belonged to a director.

If this did happen, how would you account for the £50k of cash received?

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Replying to chrisacc1985:
Stepurhan
By stepurhan
17th Jun 2021 09:31

I'd disengage because I wouldn't want to work with a business that sold items that didn't belong to them.

Seriously, that is a dumb hypothetical. Are you actually facing this issue or are you just making up weird situations for no good reason?

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Replying to stepurhan:
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By chrisacc1985
17th Jun 2021 09:46

If the lender is happy with it, surely it would be ok?

The situation I have is regards to a director who has leant cryptocurrency to a company and the company is using the cryptocurrency to generate profits through two methods (lending it out and using it as collateral).

Cryptocurrency isn't regarded as cash, but an intangible fixed asset. The post is a thought experience to see whether there is a parallel to the treatment of another fungible asset.

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Replying to chrisacc1985:
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By paul.benny
17th Jun 2021 10:01

That's a very different question from your hypothetical scenarios. Why not just ask the actual question.

Seems to me it's a clear example of director failing to appreciate difference between self and company. You need to explain that to him/her and then work out best how to straighten that out. One solution *may* be to restate past events so that company bought the asset with a loan from director. Rewriting history is never satisfactory but it may be the least worst option here

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Replying to paul.benny:
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By chrisacc1985
17th Jun 2021 11:07

I think the thought experiment helps to flesh out the issues at play.

The director is very aware of the difference between himself and the company.

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Replying to chrisacc1985:
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By paul.benny
17th Jun 2021 11:50

chrisacc1985 wrote:
The director is very aware of the difference between himself and the company

So he's documented an agreement between himself and company covering the terms on which the asset has been loaned, including the uses to which it may be put, the period of loan, fee payable, treatment of any losses or gains, etc.

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Replying to chrisacc1985:
Stepurhan
By stepurhan
17th Jun 2021 12:37

The actual situation is so far removed from what you first asked it's not even funny.

There is a reason why it is important to provide all relevant facts in the opening question. Why did you talk about physical assets? Why did you talk about earning money by means which require the asset to be physical? The fact we are dealing with an intangible crypto-asset makes a huge difference.

The company offering as collateral an asset it does not own is fraud. Any director who says otherwise is either a liar or really doesn't understand the difference between himself and the company.

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Replying to chrisacc1985:
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By gillybean04
17th Jun 2021 22:06

chrisacc1985 wrote:

I agree that allowing the company to sell it wouldn’t make sense, however, it is possible.

In theory it could be a third party friend, but it would more likely arise if the gold bar belonged to a director.

If this did happen, how would you account for the £50k of cash received?

You're straying into legal questions.

You cannot sell what you do not own.

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Replying to gillybean04:
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By chrisacc1985
17th Jun 2021 23:32

Are you sure that this applies to fungible assets?

One of the two main uses of the coins for the company is to lend out the asset to an unknown party of fixed terms. The borrower sales the asset with the intention of buying the asset back at the end of the loan agreement. If the borrower is able to buy the asset back when the loan is due to be repaid, they make a profit.

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Replying to chrisacc1985:
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By gillybean04
18th Jun 2021 14:31

chrisacc1985 wrote:

Are you sure that this applies to fungible assets?

One of the two main uses of the coins for the company is to lend out the asset to an unknown party of fixed terms. The borrower sales the asset with the intention of buying the asset back at the end of the loan agreement. If the borrower is able to buy the asset back when the loan is due to be repaid, they make a profit.

Nemo dat quod non habet

What you've described in reply to me sounds more like a sale than a loan (in my humble opinion).

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By Tax Dragon
17th Jun 2021 10:45

Read this thread: https://www.accountingweb.co.uk/any-answers/can-a-company-contract-a-bit...

Pay special attention to the contributions by DJKL and then richard thomas.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 13:08

Are you referring to the CGT implications for the individual on the loan of the crypto to the company?

One activity that my client is involved with is the regular lending out of his cryptocurrency to unknown parties via a cryptocurrency platform. The loanee sells the crypto as soon as they receive it and then buys it back again just before the loan is required to be repaid (in doing so hoping to make a profit on the fall in value of the currency). If the loan of crypto was a CGT event, this would be very problematic for this activity!

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 13:28

DJKL also talked about accounts.

Re CGT, problematic or not, it makes sense to me (not that I have thought too hard about this). Your client exchanges crypto for a debt - disposes of one asset and acquires another. The acquirer, you say, immediately sells the crypto - so it's pretty clear that your client does not own it at that point! Later, your client exchanges the debt for crypto - another disposal and acquisition.

Didn't DJKL and Richard discuss repos in that other thread? They independently concluded those rules didn't apply. The fact that they were even discussing them suggests the default CGT treatment is much as I have described.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 13:55

But the debt is the crypto lent. You wouldn't expect a CGT event to arise on the loan of jewelry.

I believe just Richard did, but I'm not sure he concludes categorically that they don't apply.

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 14:27

chrisacc1985 wrote:

But the debt is the crypto lent.

The debt is denominated in crypto. The debt is not 'the crypto'. (Which is one reason why your analogies with land, gold and jewellery don't work.)

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Replying to chrisacc1985:
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By Hugo Fair
17th Jun 2021 13:48

"If the loan of crypto was a CGT event, this would be very problematic for this activity!"

That (potential) problem does not somehow refute the posited assertion.

FWIW "the loan of crypto (is) a CGT event" is not a direct equivalent to what others have posted. As I understand it, there are other factors including the loan being based on the assumption that the cryptocurrency will be sold and later replaced via a purchase (which is not the same as "buys it back again").

Out of interest, assuming that your client isn't some billionaire carrying out social experiments just for fun, what's in it for her/him (if any gain/loss during the loan period isn't somehow shared)?

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Replying to Hugo Fair:
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By chrisacc1985
17th Jun 2021 14:00

Agreed, but also suggests that the legislation isn't fit for purpose. AlexWT mentions that HMRC treat crypto as a security for CGT purposes (eg requires the share matching rules to apply), and I don't believe that there is legislation actually stating that this is the correct treatment.

There is nothing really in it for him, but it is putting to use the crypto instead of it remaining ideal.

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Replying to chrisacc1985:
Stepurhan
By stepurhan
17th Jun 2021 14:48

chrisacc1985 wrote:

There is nothing really in it for him, but it is putting to use the crypto instead of it remaining ideal.


Then why does he do it?

I genuinely want to know. If he is not expecting to get a return from lending his crypto (whether to his company or others) then why does he do it? He is risking loss of a valuable asset (through default) and not even charging interest in return?

Either you and your "client" are both idiots or this is a stupid invented wind-up. Either way I'm out.

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Replying to stepurhan:
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By Tax Dragon
17th Jun 2021 15:56

stepurhan wrote:

Then why does he do it?

I genuinely want to know.

Makes no sense to me either. (Incidentally, just as there may be CGT on the 'lending', there may well be income tax on the 'repayment'. At least, I'd like to see the tax analysis that [correctly] demonstrated these charges did not apply.)

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Replying to stepurhan:
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By chrisacc1985
17th Jun 2021 16:12

"Either you and your "client" are both idiots or this is a stupid invented wind-up" - Not professional conduct and very rude.

If his company is able to generate income from using the crypto in the company, then there is a return?

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 16:37

chrisacc1985 wrote:

If his company is able to generate income from using the crypto in the company, then there is a return?

So your line about unknown borrowers was just another thought experiment?

I'd keep them to yourself in future - else announce what you are doing. They are causing upset in here.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 16:41

Apologies, it has been in no way my intention to mislead or upset anybody by this. I have a very complicated scenario in an area that there does not seem to be a lot of guidance or expertise.

The "unknown borrowers" was not a thought experiment, but the reality of what the company is doing. It is done on a crypto platform, which is similar to a peer to peer lending site. The lender does not know who the borrowed is, they just know the terms of the lending agreement.

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Replying to Hugo Fair:
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By Tax Dragon
17th Jun 2021 15:52

Hugo Fair wrote:

FWIW "the loan of crypto (is) a CGT event" is not a direct equivalent to what others have posted.

It's a pretty good statement of what I suspect the position to be, though.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 16:15

What part of the legislation would be in point if the loan was treated as a disposal?

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 16:28

chrisacc1985 wrote:

What part of the legislation would be in point if the loan was treated as a disposal?

Pretty much all of it, I think.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 16:37

Eh? A loan of an asset is not a disposal! By definition surely?

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By Hugo Fair
17th Jun 2021 16:59

I'm sorry in advance if you regard this as rude, but your posts so far are analogous to a gold prospector scrabbling around in the dust ... in that you know what you want to find (or hear), but aren't interested in anything else you encounter.
However, treating the thoughts of experienced practitioners as unwanted detritus is not endearing you to other readers ... nor does it increase the chances of you striking gold.
And the bottom-line ... if you want (as appears to be the case) to continue with the operation as outlined, then you're going to have to deal with HMRC at some point (even if you've somehow found someone else to support your viewpoint).

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Replying to Hugo Fair:
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By chrisacc1985
17th Jun 2021 17:14

Not rude at all. I don't recognise the characterisation, however, as I am very much keen to find the correct treatment.

Treating a loan as a disposal to me does not seem correct, and unless I have over missed something in this thread or the thread that Tax Dragon linked to, I don't see under what rule the loan would be treated as a disposal.

The position I am in at the moment is that having spent a (very) significant amount of hours on the issue, I have been unable to find something that appears to be the definitively correct treatment. The client is of the opinion that I will not find a definitive treatment, and that we should just use the treatment that we feel is most correct and then thoroughly disclose on the CT600 what has been done. My intention now is to speak to my institute to see whether this would constitute negligent or unprofessional behavior.

The client is not trying to avoid any tax, and has said that if it was him we should value the company at the start and end of the year and pay tax on the difference. Obviously this isn't the way the tax system operates, but demonstrates that he is not trying to avoid any tax.

You could argue that there is a tax avoidance motive in that a company is being used to carry out the transactions, rather than him carrying them out in his own name, however, we have addressed this point with other senior tax advisers and it is there opinion that no anti-avoidance legislation would be relevant for these transactions.

I do appreciate, and very much respect, the opinions of the experienced practitioners on AW.

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Replying to chrisacc1985:
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By paul.benny
17th Jun 2021 17:14

See below about FRS102 definitions. Since someone else is controlling and earning return on crypto, I think owner has disposed of it.

I'll let those who properly know about tax comment thereon. My limited knowledge says that (corporate) tax treatment generally follows the accounting.

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 17:15

chrisacc1985 wrote:

Eh? A loan of an asset is not a disposal! By definition surely?

But it kind of is, isn't it? Even with your (naff) first example of farmland. Say I give you the right to occupy and use my farmland for a period, I have made a disposal of my right to occupy and use the land for that period. If (Hugo's point) I also give you the right to sell my land, which you do, and return something else to me at the end of the period, it feels to me like I have made a disposal of the whole of the land. Even if, or so it seems to me, you actually managed to buy back the land before the period was up and returned to me what I had 'lent' you.

And that's with land, which I can come and inspect at any point during the period. That (inspection) is not so readily doable with an intangible, fungible, asset.

But I'm not sure how much any of this is relevant. I suspect you would find that the law (the actual law, never mind tax law) would treat the 'loan' of a unique, tangible asset, very differently from the lending of cash. Crypto isn't cash - as I know you know - but it does seem to be much closer in nature to cash than it does to farmland. Or gold. Or jewellery. (Maybe make the cash USD - or whatever they currently use in El Salvador - for an even closer comparison.)

Fortunately, I am not a lawyer, so I can leave you to consider or ignore these thoughts as you see fit.

BTW I agree with Hugo' and Paul's most recent posts.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 17:28

I take your point that a part disposal has occurred when the farmland is lent. This would, however, only suggest that a part disposal had occurred wouldn't it?

The difference between cryptocurrency and other assets, is that the cryptocurrency is fungible and doesn't deteriorate over time. The lender is therefore not losing any part of what he already had.

You can inspect crypto directly on the blockchain, however, my clients crypto is held on an exchange and I don't believe that his precise coins will be identifiable.

I apologise if you feel I have been dismissive of your posts in anyway, you have responded to me on a number of other points too, and the responses were very appreciated.

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 18:42

But I'm not sure you take my point that (afaik), if I let you use my land, it doesn't (in law) create a debt between us.

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 18:41

Assuming you mean a monetary debt, surely that just serves my point that there hasn’t been a disposal?

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By Tax Dragon
17th Jun 2021 18:48

How so? Oh you mean crypto isn't money.

I'm breaking this off now to eat.

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Replying to Tax Dragon:
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By Tax Dragon
17th Jun 2021 19:21

I actually ate fast enough to be in time to edit my post. That's depressing.

You may be right in part. But Hugo's point (and indeed now I see Paul's point re the accounts too) is that there is a disposal of the crypto, even ignoring my point. And indeed I think Richard's starting point was that beneficial ownership (therefore CGT ownership) is given away at the start.

If I lent you the keys to my house, you sold the house, and paid me back with keys to a different house, I think you would agree I had disposed of my house. (I'm sure you'll understand my reference to keys.)

Here's a thought experiment for you. You and I have identical (but for the registration) gold bars. We swap them. Have we made disposals?

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By paul.benny
17th Jun 2021 17:03

Re-reading this, I see some confusion about the identity of the parties.

A number of posts, including my own, have read the scenario as being where client loans an asset to a company he controls and the company then lends/pledges/whatever this asset.

Later posts seem to imply that client is loaning his asset directly to third parties.

Which is it?

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Replying to paul.benny:
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By chrisacc1985
17th Jun 2021 17:18

Two transactions are occuring. The director is lending the crypto to the company and is not receiving anything in return.

The company is then lending the crypto out to an unknown third party on a crypto lending platform.

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Replying to chrisacc1985:
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By Hugo Fair
17th Jun 2021 17:38

It's like drawing teeth ... but we have another pin in the map.

When I asked "what's in it for (your client) if any gain/loss during the loan period isn't somehow shared?" ... and you responded "There is nothing really in it for him", that was potentially misleading.

So now that we know "The company is then lending the crypto out to an unknown third party on a crypto lending platform" ... I'll try one final time to re-phrase my previous question:
* What's in it for your client's company if any gain/loss during the period of that secondary loan isn't somehow shared with the 'unknown third party'?

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Replying to Hugo Fair:
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By chrisacc1985
17th Jun 2021 17:44

The thread has become very disjointed, but I have mentioned this a couple of times further up: -
- 13.08 - "One activity that my client is involved with is the regular lending out of his cryptocurrency to unknown parties via a cryptocurrency platform. The loanee sells the crypto as soon as they receive it and then buys it back again just before the loan is required to be repaid (in doing so hoping to make a profit on the fall in value of the currency). "
- 09.46 - "the company is using the cryptocurrency to generate profits through two methods (lending it out and using it as collateral)."

The client's company earns interest in the form of crypto for the loans to the the third party, that's whats in it for the company. There is nothing, directly, in it for the director is lending the crypto to the company. The third party is effectively engaged in shorting the market.

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Replying to chrisacc1985:
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By Hugo Fair
17th Jun 2021 18:46

Thanks for the (slight) clarification.
FWIW I'm not interested in what the third party does or aims to achieve - at least that is assuming that it cannot be considered a connected party?

But I think we've finally stumbled on the heart of the issue (and why the question was asked in the first place):
* "the company is using the cryptocurrency ... as collateral", which seems to me to be dubious if it doesn't own the 'asset' being provided as collateral.

Whether or not this is allowed (and what assumptions have to be made in order for it to be so regarded) are beyond my pay grade ... but others with a legislative bent may have views?

Whilst I know we haven't extracted all the relevant info from OP, this is the first bit that begins to make sense (at least in terms of why the question was asked).

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By Paul Crowley
17th Jun 2021 17:06

So what happened to the Gold bar and Pea Viner?

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By Hugo Fair
17th Jun 2021 19:39

Sounds like an intriguing alcohol-free pub.

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By paul.benny
17th Jun 2021 17:16

Although the discussion has gone down the tax treatment, the OP actually asked about the accounting treatment.

That one is fairly clear. The definition section of FRS102 describes an asset as a resource controlled by an entity from which the entity is expecting to receive future economic benefits. There is a similar mirror definition of a liability.

Conclusion - the loaned crypto meets the definitions and must be recognised as an asset and liability in the hands of the borrower.

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Replying to paul.benny:
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By chrisacc1985
17th Jun 2021 17:29

Thank you Paul. So would you recognise the pea viner and the bar of gold then?

How would you recognise the liability, as a provision?

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 18:09

The other (maybe even the main) reason I mentioned the old thread was that DJKL had talked through the accounting position. At least, I thought he had.

The tax discussion was a bonus.

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Replying to chrisacc1985:
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By paul.benny
17th Jun 2021 18:50

The liability is, well, a liability. Creditors< 1 year unless there is any basis for treating it as long term. Per FRS102 definitions, "provision" implies uncertainty of value.

So to deal with your hypotheticals: neither of those appear to meet the FRS102 definition of assets when in the hands of the borrower. The loan of a pea viner is akin to a short term hire by the borrower, falling under the definition of an operating lease. As for the exhibitor of a gold bar, they don't have economic control nor will (material) future economic benefits will flow to them.

In your extended hypothetical where owner of gold bar allows borrower to sell it rather than merely hold it, the bullion starts to look like an asset in the hands of the borrower.

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Replying to paul.benny:
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By chrisacc1985
17th Jun 2021 19:00

There is uncertainty of value given the volatility of crypto and that the repayment date is unknown.

As far as I am aware; there are no rules for accounting for a tangible or intangible asset liability.

Does a lease not need to be for consideration and for a set period?

What if the borrower has the right to dispose of the gold bar, provided that they returned a gold bar of the same quality?

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Replying to chrisacc1985:
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By paul.benny
17th Jun 2021 19:47

If the value of the liability is dependent on some other criterion - eg the value of gold, you're potentially into derivatives accounting. That gets complex and is far beyond the scope of free advice.

Absent any agreement to the contrary, repayment date should be treated as on demand.

Can't be bothered to discuss the hypothetical gold bars any further. I'm starting to get the impression you're looking for people to confirm your views (whatever they are).

Bear in mind there are two parties here - director and his company. The accounting treatment in the company may not mirror the treatment in his personal tax return. It may depend on the apparently non-existent agreement covering his loan of his crypto to his company.

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Replying to paul.benny:
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By chrisacc1985
17th Jun 2021 20:59

As I’ve said above, I have spent a very long time on this already. I have considered the derivative rules, but I don’t think that they apply.

I’m not looking for someone to confirm my position, more to see the point of view that I am currently exploring and either agree or make it clear why it wouldn’t apply. I could be wrong and I’ve missed something, but I don’t think anyone has fully grasped my point of view above. I take your point with regards to recognising an asset when the company has the risk and rewards, however.

Thanks very much for your help.

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